Health Net Inc. (HNT)

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Health Net, Inc. (HNT)

Q4 2011 Earnings Conference Call

February 3, 2012 11:00 AM ET

Executives

Angie McCabe – Vice President of Investor Relations

Jay Gellert - Chief Executive Officer

Analysts

Ana Gupte - Sanford Bernstein

Kevin Fishbeck – Bank of America Merrill Lynch

Christine Arnold - Cowen

Josh Raskin - Barclays Capital

David Windley - Jefferies

Peter Costa - Wells Fargo Securities

Carl McDonald - Citigroup

Charles Boorady - Crédit Suisse

Presentation

Operator

Good morning, and welcome to the Health Net, Incorporated Fourth Quarter and Year-End 2011 Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Angie McCabe, Vice President of Investor Relations. Please go ahead, ma'am.

Angie McCabe

Thank you, David and thank you all for joining for a discussion of Health Net's fourth quarter and year-end 2011 results. During this call, we will make forward-looking statements are subject to certain risks and uncertainties. Risk factors that may impact those statements and could cause actual future results to differ materially from currently expected results are described in our filings with the SEC, as well as the cautionary statements in our press release issued in advance of this call.

In today's call, we will refer to adjusted days claims payable, which excludes reserves from health plan services costs related to the Company's capitation, provider and other claim settlements and Medicare Part-D payables and costs. This adjusted metric is not being presented in accordance with Generally Accepted Accounting Principles or GAAP. Please refer to today's press release, which is available on the Company's website, for a reconciliation of this non-GAAP financial measure with the most directly comparable GAAP financial measure days claims payable.

I will now turn the call over to Jay Gellert, Health Net's CEO.

Jay Gellert

Thank you, Angie and good morning everyone. We are pleased to report on a solid fourth quarter and a strong 2011. Key operating and financial metrics for the combined western region and government contract segments. In the fourth quarter of 2011 showed market improvements compared with the fourth quarter of 2010.

I want to focus this morning on comparing the full year of 2011 versus 2010 and reflect on our progress. I’ll compare it with our expectations laid out at our Investor Day last year and offer some additional long-term perspective on our performance. GAAP earnings per diluted share for 2011 were $0.80, which is less than our original guidance due to an unexpected legal judgment in the first quarter.

Earnings per diluted share for our Combined Western Region and Government Contract segment were $3.09 well ahead of our original guidance of at least $2.75. Improved margins and a lower share account were the primary drivers of our better than expected full year results.

One of our primary goals is to produce steady margin improvement, while the GAAP pre-tax margin was 1.5% in ’11, the pre-tax margin on our combined Western Region and Government Contract segment was 3.8%. This is a solid 60 basis point gain year-over-year and a 50 basis point fourth quarter to fourth quarter.

We’ve also focused on capital redeployment through share buybacks. In ’11 we exceeded our annual guidance by a substantial amount. We bought back 13.6 million shares for approximately $374 million. That’s more than 14% of the outstanding common shares as of the end of 2010.

Let me talk about our enrollment now. Overall, health plan enrollment rose in ’11 led by Medicaid. Our California State Health Programs business exceeded its annual enrollment goal as membership rose 12% in 2011. The economy remains an important factor in the growth of the basic medical program.

In addition, we began to enroll new seniors and persons with disabilities on June 1, 2011. At December 31, 2011, we had approximately 52,000 additional SPD members for a total of approximately 81,000.

We will continue to enroll new SPD members through May of ’12. In Commercial, enrollment in our tailored network products grew by 35% in ’11. At the end of ’11 they accounted for 31% of our total commercial enrollment compared with only 23% at the end of ’10.

In Medicare we ended ’11 with the expectation for enrollment declines as we were unable to add new individual members. However we did better than expected as we were down only 7.7% in ’11 and actually, added new members in the fourth quarter.

We entered ’12 with encouraging early signs based on current enrollment day we may exceed our annual MA membership growth guidance of 8%to 10% in the first quarter alone.

Let me now turn to our medical care ratio and premium yield healthcare cost performance data in ’11. We had originally expected a positive commercial spread between premiums and healthcare costs of 40 to 60 basis points. For the full year, it was actually positive by a 110 basis points and our ’12 guidance points the further gains.

In ’11, the positive spread drove the commercial gross margin PMPM higher by 12% compared to ’10. Since the end of 2009 it’s up by approximately 27%. Commercial healthcare PMPM cost increase in ’11 was 4%. This moderate level of healthcare inflation was due to more members and cost-efficient networks and low utilization trends throughout the year.

We are also seeing lower unit cost increases across our commercial provider networks, an encouraging development. Thanks to the efforts of our associates over the past three years, we are today a much stronger competitor in commercial markets. Our products are popular by meeting consumer needs for affordability and coverage.

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